No ESOP shares sold, tax already deducted: Why could you still face an I-T notice?

His employer had already deducted tax when his foreign stock options (ESOPs) vested, and his salary numbers matched up under the new tax regime. Since he reported his income and claimed his usual deductions, Mudit assumed his taxes were fully done.

That changed when he got an email notice from the Income Tax Department. India’s tax systems had received financial data from abroad showing that Mudit owned foreign shares that were missing from his tax return. Even though Mudit had not sold a single share and had already paid tax when the stock vested, he was now facing penalties for leaving foreign assets off his return.

Realizing foreign asset rules can be tricky, Mudit reached out to ClearTax for help. ClearTax assigned tax expert CA Samadhan to take over the case. Mudit shared his foreign stock statements, his ESOP documents, and his tax portal details so the team could check what went wrong.

The issue came down to a simple mistake many employees make. The tax deducted by an employer on vested shares covers your regular income tax, but it does not count as declaring those assets to the government. Under Indian rules, just holding foreign shares or unexercised options means you have to list their highest value and ending balance in a special section called Schedule FA.

Since Mudit had already filed his return, CA Samadhan prepared a revised return under Section 139(5) to fix the mistake. To meet the income tax portal’s system formatting requirements, the expert created an offline JSON file for ITR-2, checked all the stock values, and uploaded the updated file directly.

Once the corrected Schedule FA details were uploaded, the tax department updated Mudit’s profile and closed the case. Mudit’s experience brings out three simple lessons for anyone holding foreign stock options:

1. Tax withheld by your employer is not asset reporting: Paying tax when shares vest covers your income tax, but you still have to declare the foreign asset separately on Schedule FA.
2. You must declare unsold shares: You do not have to sell your foreign shares to trigger reporting rules; just owning them means you must report them.
3. Fix mistakes with a revised return: If you realize you forgot to report a foreign asset, you can file a revised return under Section 139(5) to correct your records.

Getting help from a qualified tax expert makes sure your foreign holdings are reported correctly, keeping you safe from unexpected notices and penalties.

(The author is the founder and CEO of ClearTax)

Disclaimer: The views expressed in this article are solely those of the author and do not reflect the official policy, editorial position or views of Financial Express. The article is intended for informational purposes only and should not be construed as tax, legal or financial advice.

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